Never draw too many decisions from a single quarter, especially if that quarter is the first one.
That’s a lesson I learned some time ago, but it’s also proven difficult to adhere to over time, particularly when we get a quarter like the first one that was surprisingly weak and loaded with so many proclamations of difficulty.
So, by a long shot, the thing we’re curious the most about this coming earnings season is whether this difficulty has continued or whether sales and traffic are stabilizing.
Early indications are not encouraging. On Friday, Canadian restaurant chain collector MTY Group, which owns U.S. brands Papa Murphy’s, Wetzel’s Pretzels, Cold Stone Creamery and several other brands, provided a discouraging outlook.
“Current macroeconomic conditions remain highly fluid and, in some cases, challenging,” CEO Eric Lefebvre told analysts, according to a transcript on the financial services site AlphaSense. “U.S. consumers have been particularly affected by economic uncertainty.”
MTY is something of a lab for this view, given its presence both in the U.S. and Canada. In the U.S., same-store sales declined 3.8% for the company’s chains. In Canada, they increased 1.4%.
Lefebvre had previously called the U.S. environment “choppy.” It’s not that choppy anymore.
“The choppiness became less choppy and more consistently negative,” he said.
Here’s what else we’re watching for …
Can the two giants recover? The current environment is notable for the difficulty so many of the largest chains have had. McDonald’s is in its worst sales slump in a decade. Starbucks’ slump is even worse.
Both have some hope of improvement. McDonald’s recently unleashed a slew of traffic-driving efforts, including a Minecraft Meal that was sold out within two weeks, followed by McCrispy Strips that received mixed reviews. The return of the Snack Wrap last week—after the end of the second quarter—has also provided a boost.
Starbucks is less certain. But the company’s same-store sales trajectory has been slowly improving as it focuses on the in-store experience. Both chains have a way to go, however.
Is the full-service sector really back? At some point, Chili’s will report numbers far weaker than those it has reported over the past year.
But its performance, and the performance of chains like Olive Garden, BJ’s Restaurants and Red Robin have all demonstrated a consumer suddenly rediscovering the full-service sector.
That sector outperformed quick-service restaurants for the first time in years and now has the opportunity to grab some meaningful share for the first time in ages.
A bunch of chains are in limbo right now. Think about it. Wendy’s CEO just left for The Hershey Company.Jack in the Box has an activist investor that may or may not do something big. El Pollo Loco is on the market. Probably. Oh, and there are groups trying to buy Papa Johns.
Each of these companies faces major questions. Why is Wendy’s, a generally consistent industry performer, suddenly facing all this management turnover? Can Jack in the Box find a buyer for Del Taco and then get its house in order? Can El Pollo Loco avoid the activist investor Sardar Biglari?
Will Papa Johns, which has seemingly been fending off some sort of acquisition rumor roughly forever, finally pull the trigger on a deal?
Speaking of pizza, can it do anything? Domino’s reports next week, which will truly kick off earnings season.
No sector has been as consistently weak as has pizza over the past three years, and frankly it doesn’t matter what service style it’s in. Consumers have so many options these days. Third-party delivery has removed one of its major selling points, forcing the companies to adapt.
Domino’s has generally outperformed that sector over that period. Its performance will provide a real test of whether that sector can regain some momentum.